With the UK's first Budget under Chancellor Rachel Reeves on the horizon, all eyes are on the tough fiscal choices that await. Academic experts from the University of Bath's School of Management and Department of Economics offer insights into the economic landscape ahead, highlighting the pivotal themes and potential challenges that could shape the country's future.
The Economic Landscape: An Era-Defining Budget
Professor Chris Martin, monetary policy expert from the University’s Department of Economics, said:
“The UK Budget is shaping up to be one of the most important economic events in recent years. The Labour Government was elected because it persuaded enough voters that increased spending on public services and increased investment in national infrastructure were necessary. Difficult questions around how this was to be financed, mainly ducked during the election, will be answered in the Budget.
“The Budget looks to be shaped by two broad principles: taxes must rise to enable a small increase in real expenditure; and the current rules around borrowing will be relaxed to enable a large increase in investment in infrastructure, funded by increased borrowing.
“The Government seems to have learned an important lesson from recent history: the broad shape of the Budget has been made clear well in advance and key opinion formers have been brought onside. Hopefully, financial markets will not be spooked in the way they were during the Liz Truss fiasco.
“The core belief underpinning this approach is that investment will begin to increase growth, enabling competing demands to be met from an expanding budget. Most economists agree with this approach. But it will not be easy. Large infrastructure projects are frequently delayed and over-budget. The benefits of improved public infrastructure come through slowly and are hard to measure. Demographics are adding ever-more demand for public spending. And our political system is short-sighted and impatient. It will take a lot of luck, stamina and political courage to make this work.”
Infrastructure, Growth, and the Path to Net Zero
Professor Mike Lewis, from the University of Bath’s School of Management, specialising in operations and supply chains, major projects and the route to achieving Net Zero, said:
“The upcoming UK Budget is expected to focus on boosting economic growth by addressing key infrastructure needs and supporting industrial strategy. The Government reclassifying capital spending as long-term assets may create options to increase investment capacity, and they will still have to keep within (self-imposed) rules - there are risks with high borrowing, particularly in a volatile interest-rate environment.
“The Government will likely also encourage pension funds to invest more in productive assets, leveraging billions in new investments for infrastructure and industry. Tax incentives for automation and robotics, are likely to feature and sustainability will be a central theme, with incentives for businesses investing in renewable energy, etc. But there will be a challenge in balancing the government’s various missions.
“Investment-led growth still requires tough fiscal decisions, including well flagged (if imprecise) tax hikes and spending cuts. The potential long-term growth effects of these strategies, especially given historical infrastructure projects, requires scepticism. While new projects may be critical and promise growth, experience and recent reports show how hard it is to deliver.”
Fiscal Realities: Tough Decisions Ahead
Dr Bruce Morley, an expert in macroeconomics and finance in the University’s Department of Economics, said:
“Due to the levels of government spending before the recent election, which is part of the usual political business cycle and the above inflation pay deals in the public sector, which have not been funded by increases in productivity, there is a wider budget deficit than expected. The problems have been highlighted by the high level of borrowing for September, which amounted to about £16.6 billion.
“Some cuts in spending have already been announced such as the winter fuel allowance for some, others are likely to follow. There is likely to be substantial increases in taxation, although as yet it is not clear where the extra burden is likely to fall, although it could include extra taxes on inheritances, pensions, oil and other energy products as well as possibly general taxes.
“Another possibility is for the government to borrow more, this is likely to push government debt over the 100% of annual output, with adverse effects on future growth. It could stipulate that extra borrowing is only for investment purposes covering the typical business cycle, as done by previous chancellors. The problem with this is the definition of investment and time span it applies to tends to be vague and flexible. As this will involve more government borrowing, it will increase long-term interest rates, mortgage rates and reduce private sector investment. This would facilitate a transfer of resources from the private to the less productive public sector.”
The Road Ahead: Challenges and Opportunities
As the UK gears up for one of its most critical Budgets in recent history, the balance between stimulating growth and maintaining fiscal stability will be crucial. The Government's approach—combining higher taxes, increased borrowing, and targeted investments—will shape the country's economic trajectory. The upcoming Budget will indeed be a test of the Government's economic strategy, with significant risks and uncertainties on the horizon.
For further insights or to arrange interviews, please contact the University of Bath Press Office.
To greater understand these issues, and designed for senior policymakers and decision-makers from government and the third sector, the IPR Policy Fellowship Programme offers the opportunity to explore policy questions or challenges through a bespoke programme of tailored meetings with leading academics based at the University of Bath. Find out more here.
All articles posted on this blog give the views of the author(s), and not the position of the IPR, nor of the University of Bath.
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